THE BLOG
07/01/2014 04:57 pm ET Updated Aug 31, 2014

Building a Better Economy Is a Shared Task

by Priscila Bala, MBA Graduate, Yale School of Management

Don't let its friendly moniker fool you: the sharing economy is serious business. The past five years have seen it grow from a few innovative experiments in collaborative consumption to a $110 billion industry that gives consumers access to guest rooms, cars, boats, clothes, office space, parking spaces and consumer goods owned by their peers. Through its technology-driven renting, lending or swapping model the sharing economy generally means transparent supply, better prices, more efficient and sustainable use of assets, and better social connections. Its consumption reinvention could be a solution to resource scarcity problems and a bonanza for reducing environmental impact. Its technology uncovers new business opportunities and fuels entrepreneurship. How come more people haven't heard of it?

Despite the presumed success of the shared economy, U.S. consumer spending - $7 trillion, or two-thirds of U.S. GDP - dwarfs its size. While millennials - natives of social media educated by online renting and streaming services - have embraced sharing services and turned companies like AirBnB and Uber into powerhouses worth billions, other generations have been more reluctant to adopt the shared model.

Don't Throw the Baby Out With the Bathwater

One of the public discourse shortcomings of the shared economy is that searching for value - not reducing consumption - has fueled its growth. Detractors say the reason it has grown so rapidly is that without jobs or enough money to pay their bills, people have turned to opening their homes or renting out their cars or closets in a desperate attempt to make ends meet. They call it the "depression economy," instead of "sharing economy."

The critics are right in affirming that the shared economy is a by-product of the difficult times we live in. It is no coincidence that its meteoric ascendance overlapped with what could be the worst financial crisis in history, the highest global historical youth unemployment rate, and an increase in income inequality.

However, praising the shared economy does not mean agreeing with the underlying systemic and structural economic problems that have made its need so urgent. The terrible current economic times have encouraged and furthered its expansion, but it is an economic model we should be seeking in any event. Those who focus exclusively on the difficulties of one population that is visibly making use of its opportunities (those struggling to make ends meet), miss the bigger picture: the shared economy is the most viable sustainable consumption model we have, and without it the world will soon face serious resource crises.

Something's Gotta Give

How serious? Let's take a look at some of the evidence. The World Bank estimates that by 2025 there will be 1.1 billion more people on the planet and 1.8 billion additional middle class consumers; McKinsey predicts the number of new consumers could be as high as 3 billion. Its Resource Revolution report argues that resource productivity will be at the heart of business strategy and public policy moving forward, as the expected consumption growth of the next decade will require a 47% increase in packaging and 41% increase in the use of end-of-life materials.

The difficulties are already here: from 2002 to 2010 commodity prices overall increased 150%, erasing a full century of real price declines. The period also saw higher price volatility for agricultural inputs and metals than any other decade of the 20th century. Around 65 billion tons of raw materials were used in 2010; by 2020 that number is projected to be 82 billion. In addition, current levels of consumption are unsustainable if scaled worldwide: by 2002 houses in the U.S. grew to be 38% larger than in 1975 despite a smaller family size; by 2003 the U.S. had more private cars than licensed drivers.

It is irresponsible to continue ignoring the destructive impact of developed-world consumption lifestyles on our planet, and yet the very notion of progress demands an ever-increasing quality of life for more of the world's population. So what gives? Here is where "access over ownership" reaches its crowning achievement: it allows consumers to experience the utility of a wider range of goods, without the inefficiencies and waste of the current consumption model.

It's Plain Good Economics

The shared economy is here to stay, because its underlying economics is not resource conservation, community building or simple bargain hunting: it is asset utilization. At any given point in time most personal assets are not being used: cars are parked; guest rooms are empty; sheds, garages and closets are full. Allowing other people to use those assets for a fee when they would otherwise sit idle both monetizes their utility and reduces the overall number of goods needed. As the average car is used for just about one hour a day, each sharing vehicle removes 9-13 cars from the road.

Technology has lowered transaction costs by easily matching items from trustworthy people to interested parties, unleashing a new host of business models. Giving consumers the option to purchase from a store or rent from a neighbor in effect raises the number of offerings available - in economic terms, it increases supply. More supply means more competition and lower prices: a victory for consumers.

Critics of the shared economy say that the lower prices offered "steal" customers away from registered local businesses, and that shared economy gains come at the expense of existing enterprises. While some of its growth can undoubtedly come from dislocation, I argue that much of the sharing economy's gains come from expanding the market and creating new economic activity.

The market's job is to maximize utility by satisfying people's needs. Using travel accommodations as an example, some people need community, and prefer to stay in a private home when traveling; other people need privacy and will gladly pay for the comfort of a hotel. A few people need igloos; a few others need castles. The perfect market would have as many offerings as there are needs. Allowing people to offer unique and non-standard items to others, while sharing the maintenance costs of the system (each homeowner cares for his or her property) brings us much closer to optimizing utility on a broader scale.

Enabling Entrepreneurship

When it comes to entrepreneurship, the sharing economy is to be lauded not for letting people make a few extra bucks, but because it changes the way new products and markets can be tested. As discussed, it uncovers and expands demand, and this ability allows entrepreneurs and businesses to better allocate resources by validating market needs and understanding demand.

Young entrepreneurs will have heard the concept of "lean startup." It turns out that most new business plans don't survive first contact with customers, because their ideas are something customers don't want or don't appreciate. Recognizing this difficulty, Steve Blank, Bob Dorf and others developed a set of principles to build new businesses around customer feedback. Instead of writing a plan and spending money to make it real, entrepreneurs should get out the door with a minimum viable product as soon as possible and talk to customers.

Enter the sharing economy and its attendant technology: now anyone, anywhere, can get a real sense of what consumers are up to in various markets - what access they are buying and for how much. Very quickly and cheaply, what used to be the domain of market research companies becomes available knowledge. Aspiring entrepreneurs can look at these market dynamics and start thinking about how best to address them, or what ancillary products or services could be profitable. They now have access to credible, public information to drive their entrepreneurial decisions.

The notion of "micro-entrepreneurs," a term popularized by Thomas Friedman to describe ordinary citizens who make money by sharing their assets, has been widely decried as another sign of the decline of the economy. Critics say these activities are no substitute for real jobs with health benefits and some sense of security - and I agree. In my view, instead of substitutes, these micro-enterprises are complements. They expand people's range of options, and especially when it comes to millennials, they create avenues that allow for resourcefulness and flexibility in their pursuits. Jamie Wong, co-founder of Vayable.com, told Friedman:

"I moved out of my apartment in central San Francisco, rented a cheaper annex in a friend's home, and 'airbnb-ed' my apartment for $200 a night and earned about $20,000 in a year. It enabled me to bootstrap my start-up. Airbnb was our first round of funding!"

Her company, a Silicon Valley startup platform to connect tourists to locals who want to be their guides, now has over 5,000 people in 600 cities offering tours, and a jobs page with four open job postings.

The Future of Sharing

Whether it's market intelligence or financial bootstrapping, the sharing economy has the ability to stretch common citizens' present experience. As the music and video industry made abundantly clear to millennials with services like Netflix and Spotify, when customers are liberated from ownership, they gain access to a much wider variety of goods. In an interview to the New Yorker, Professor Arun Sundararajan of N.Y.U's Stern School of Business shared that

"there's a mind-set that consumers are doing this just to save money, but I think that what's really compelling about the sharing economy is the variety and expansion of choices that it offers. Instead of being tied to owning one car, I can drive twenty different ones. So I expect this will expand consumption, rather than shrink it."

Sundararajan's intuition is already proving true, and established brands are using the sharing economy as an entryway to consumers' hearts: Rent the Runway co-founder Jennifer Hyman mentions

"we've seen incredible conversion post-rental from our renters to buyers of that brand,"

Tracy DiNunzio, Tradesy's founder, also mentions that

"early data suggests that our customers actually spend more at retail when they feel confident that there's a viable resale opportunity on the secondary market,"

while GM is banking on RelayRides renters enjoying their OnStar and driving experience enough to buy more GM cars.

The uncertain future of sharing sits in between these two forces: vital startups that brave ahead in spite of regulation uncertainties and multinational behemoths who need to preserve their economic relevance while restricted by their current business models. Sharing will always depend on crowdsourcing, but the platforms that facilitate those transactions will grow ever more professional, joining the ranks of large companies. A slew of small and medium-sized business will rise to pick up some of the demand unveiled by sharing.

Nonetheless, the relevance and the continued growth of the shared economy require a cultural shift that places shared consumption on an equal or higher footing than ownership. The undercurrent in most criticisms that tie the shared economy with these troubled economic times is that "used is less:" that sharing is somehow undignified, that it falls short of our communal ideal of success or quality of life. These views mark the deepest divide between millennials and other generations, and if not checked might prove to be the undoing of our resources and our world.

How can we ensure the sharing economy succeeds? It is past time leaders everywhere faced up to the unequivocal crisis we will soon face if our consumption habits don't change today. There is no more time to wait for some other technological solution, or to pretend that our current excesses won't haunt our children. We have found the solution, and it offers clear benefits: it expands financial opportunities in the system, it vastly improves our resource efficiencies and it creates a more connected society.

It is up to all of us to change the conversation around sharing from one of poverty and necessity to one of responsibility and access. Despite our differences, there is power in recognizing that our daughters look beautiful in the same lavender hue and that you build shelves for your loved books just as I do. Sharing the dress and the power drill won't make us less - it will turn us into more: we will become a community that understands and lives by the truth that the struggle and the glory of building a better world are shared tasks, crowd-sourced by all those who want a part in it.

If the sharing economy is not better known or better loved, the fault rests with us. It is up to the leadership of tomorrow to fully embrace and embody the principles it holds dear, and it is up to the leaders of today to envision a future better than what they know.

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